$14,000,000 to Protect Pensions

The City Council tonight approved — by a 4 to 1 vote (I opposed) — pre-paying an additional $7,000,000 towards the city’s pension obligations. A pre-payment means investing money in the California Public Employee Retirement System (CALPERS) above and beyond what the city is required to contribute.

This latest prepayment was on top of a $7,000,000 prepayment made a couple of years ago. That’s $14,000,000 invested in bolstering CALPERS so our employees can receive their pensions when they retire.

Now, the city must meet its pension obligations. So to some extent these pre-payments are a “benefit” to residents because they reduce the risk taxes might have to be raised or services cut in the future to meet the obligation. It’s also worth remembering public employee pensions are protected by law.

Prepayments are also a significant benefit to employees because they reduce the risk employee pension contributions might have to be further increased1.

To date, the city has paid every bill CALPERS has ever sent us. Even though those bills have risen significantly in the last decade.

How was this possible? Because the city was becoming such an attractive place to live and work that its revenues were rising faster than its expenses. In fact, as of last June 30th the city had $38,000,000 in reserves2.

Given our track record and other things the money could’ve funded it didn’t make sense to me to make that first prepayment several years ago. It makes even less sense to me to double-down and spend another $7,000,000 the same way today. Investing $7,000,000 — actually, $14,000,000 — to reduce a 2030 obligation when we have major problems to address in 2020 is, at the very least, an unusual choice.

It’s also odd, in the midst of all our current crises, this prepayment was approved, without discussion, outside of our budget process and with little information from staff on what financial risk the city is facing as a result of the pandemic. We might well come to wish in the not too distant future we had held onto this latest $7,000,000 prepayment.

I can’t help thinking what that $14,000,000 could have done to benefit the community — benefit it directly, immediately, today — if other community needs and interests had been considered. But the top priority seems to be to protect pensions. Which are, as I mentioned above, already heavily protected by law.

If you’re okay with $14,000,000 not being available to solve community problems today, or improving our quality of life by investing in projects benefiting the community — which, based on our recent history, would further enhance city revenues, making it easier to pay bigger pension bills — you don’t need to do anything.

But if you’re not I think it’s past time to get involved.

  1. Theoretically employee benefits might also be subject to reduction. But such reductions may be unlawful. Of course, more money prepaid into pensions by the city reduces the risk employees might see reductions in their benefits if the legal environment were to change. 

  2. Don’t be confused by almost all the money being earmarked for one thing or another. The $38,000,000 could be deployed to any valid purpose which a majority of the Council approved. The earmarks are a statement of intent not of commitment. 

5 thoughts on “$14,000,000 to Protect Pensions”

  1. Mark
    Thank you for your comments. I am uncomfortable with the fact that that the very individuals who will benefit from this excess funding are the ones who are making this decision.
    Elected officials seem to think that tax revenues are THEIR money….. IT IS NOT….it is the tax payouts money which was taken from us… if we have excess funds…. perhaps the money should be RETURNED to us in the form of lower fees for city services ie trash fees, etc

  2. Hi Tom,

    To my knowledge none of the Council members have CALPERS pensions or are eligible for such. I could be wrong about that, of course.

    In a slightly different vein, though, I think you raise a good point I didn’t mention in my article. I often tell people that city managers, school district superintendents, etc., are essentially the “invisible 6th member” of a governing body. I don’t know what conversations Jeff may have had privately with my colleagues. But I know from my conversations with him that he and I have a major difference of opinion on the reasonableness of the prepayments.

    Thanx for reminding me to mention that.

  3. I support the council decision as a financial professional with extensive government experience . I worked with many counties and hospital districts. I have seem what happens in a year when the return on investment is lower than the calculated obligation and large payments are required. A prepayment helps relieve the need for large payment when the economy is down . It also keeps elected officials who get a dollar and spend a dollar in check. The recent tax windfalls should be carefully managed and not treated as a steady revenue stream
    Bravo city council.

  4. We’ll have to agree to disagree on that, Nancy. For one thing the notion the community is better off if politicians don’t have money to spend is antithetical to the whole notion of representative democracy. If some politicians deploy public funds to less valuable ends the solution is to replace those politicians, not prevent communities from responding to events and working to build a better future.

    Financial decisions, either in the public sector or the private sector, are always about alternatives. Economists refer to that as the “opportunity cost” of a particular choice, meaning “what are we giving up by making this choice and not another one?”.

    Investing $14,000,000 in prepaying public pension obligations implies that every other use of that $14,000,000 is less “valuable” to the community. Based on my knowledge and experience I’m comfortable saying that’s wrong. That’s a political choice, not an analytical one of course (i.e., it’s not one you can make by the numbers alone because you’re balancing multiple non-financial issues in addition to the financial ones).

    There are needs and wants in the community which would, in my judgment, have been better served if they were funded with that $14,000,000. Starting with the current elephant in the room, the pandemic-induced economic crisis affecting San Carlos. But there are plenty of others, too.

    At least, that’s what my 20+ years as a financial analyst and executive (CFO of two biotech companies) and nearly 20 years as an elected official (school board and city council) have taught me. There are also a Dartmouth (Amos Tuck) MBA and an undergrad degree in molecular biology lurking around in there, too :).

  5. This prefunding a 2nd round of $7,000,000 is throwing good money down the drain at this point. Cal Pers has not demonstrated that they are responsible investors of money. Their rate of return is poor and has helped contribute to their current difficulties. They have an assumed rate of return of 7% when we are in a near 0% interest environment today and for near term.

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